1 Table of Contents INTRODUCTION... 3 SUPPLY AND DEMAND... 4 DEMAND... 4 SUPPLY... 4 EQUILIBRIUM... 4 CHANGES IN THE DEMAND CURVE... 5 CHANGES IN THE SUPPLY CURVE... 6 PRICE CONTROLS... 7 CONSUMER SURPLUS, PRODUCER SURPLUS, SOCIAL SURPLUS... 7 ELASTICITY OF DEMAND... 8 ELASTICITY OF DEMAND... 8 DETERMINANTS OF THE SIZE OF PRICE ELASTICITY OF DEMAND... 9 INCOME ELASTICITY OF DEMAND... 9 CROSS-PRICE ELASTICITY OF DEMAND... 9 ELASTICITY OF SUPPLY PRICE ELASTICITY OF SUPPLY UTILITY AND CONSUMER PREFERENCES INDIVIDUAL S DEMAND CURVE FIRMS PRODUCTION AND COSTS THE PRODUCTION FUNCTION PROFIT MAXIMISATION MARKET SUPPLY PRODUCER SURPLUS COMPETITIVE MARKETS EFFICIENCY ECONOMICS OF A FIRM COSTS FOR AN INDIVIDUAL FIRM PROFIT LOSS Breakeven point Shutdown point COSTS AND PRODUCTION: THE LONG RUN RISE AND FALL OF INDUSTRIES INCREASE IN DEMAND DECREASE IN DEMAND PROFITS SHIFTS IN COSTS CURVES EXTERNAL ECONOMIES AND DISECNOMIES OF SCALE KEY POINTS MONOPOLY MARKET POWER WHY MONOPOLIES EXIST PRICE DISCRIMINATION... 22
2 PRODUCT DIFFERENTIATION PUZZLES EXPLAINED BY PRODUCT DIFFERENTIATION OLIGOPOLY LABOUR MARKETS LABOUR DEMAND LABOUR SUPPLY LABOUR UNIONS MARKETS FOR PHYSICAL CAPITAL Rental Markets Ownership of Physical Capital MARKETS FOR FINANCIAL CAPITAL Stock Prices and Rates of Return Bond Prices and Rates of Return Trade Off Between Risk and Return CORPORATE GOVERNANCE PROBLEMS TAXES, TRANSFERS AND INCOME DISTRIBUTION THE TAX SYSTEM EFFECTS OF TAXES TRADE-OFF BETWEEN EFFICIENCY AND EQUALITY TRANSFER PAYMENTS PUBLIC GOODS EXTERNALITIES INTERNATIONAL TRADE... 36
3 Introduction Opportunity Cost Indicates what must be given up to obtain something that is desired. The cost of one item is the lost opportunity to do or consume something else; opportunity cost is the value of the next best alternative. Law Of Diminishing Marginal Utility As a person receives more of a good, the additional (marginal) utility for each additional unit of the good declines. First slice of pizza tastes better than the sixth. Sunk Costs The lesson of sunk costs is to forget about the money and time that is irretrievably gone and instead to focus on the marginal costs and benefits of current and future options. Productive Efficiency Given the available inputs and technology, it is impossible to produce more of one good without decreasing the quantity that is produced of another good. Allocative Efficiency The particular mix of goods a society produces represents the combination that society most desires. Comparative Advantage When a country can produce a good at a lower opportunity cost than another country
4 Supply And Demand Demand The amount of some good or service consumers are willing and able to purchase at each price. Law Of Demand A rise in the price of a good will cause demand for that good to decrease and vice versa. An inverse relationship that assumes ceteris parabus. Supply The amount of some good or service a producer is willing to supply at each price. Law Of Supply A rise in the price of a good almost always leads to an increase in the quantity supplies of that good or service. A positive relationship that assumes ceteris parabus. Equilibrium The point where the demand curve and supply curve intersect. Equilibrium Price The only price where the plans of consumers and producers agree the price at which consumers are willing to buy and producers are willing to sell. Excess Supply (Surplus) Above equilibrium price, the quantity supplied exceeds quantity demanded. Excess Demand (Shortage) Below equilibrium price, the quantity demanded exceeds quantity supplied.
5 Changes In The Demand Curve 1. Income A rise in the income of consumers will cause the demand for goods to increase, causing an outward shift of the demand curve A fall in the income of consumers will cause the demand for goods to fall, causing an inward shift of the demand curve Normal Good: A product whose demand rises when income rises (v.v) E.g.. Cars Inferior Good: A product whose demand falls when income rises (v.v) E.g.. Generic brand groceries 2. Changes In Consumer Tastes And Preferences 3. Changes In Price Of Closely Related Goods Substitute: A good or service that can be used in place of another good or service Price of a substitute rises - demand for original good falls Compliment: Goods that are used together Price of a compliment rises demand for original good rises 4. Changes In Consumer s Expectations Of The Future If consumers believe that the price of a good will rise in the future, they may purchase more of that good at its current price.
6 Changes In The Supply Curve 1. Changes In Technology Anything that changes the amount a firm can produce with a given amount of inputs to production can be considered a changes in technology 2. Changes In Weather Conditions Droughts, earthquakes, hurricanes and floods can affect how much of certain types of goods can be produced with given inputs. 3. Changes In The Price Of Inputs Used In Production A reduction in the price of inputs of production will lead to a reduction in production costs. Therefore, suppliers will be willing to sell their goods at a lower price, as the cost of production was reduced. 4. Changes In Number Of Firms In Market An increase in the number of firms in the market will cause a positive shift in the supply curve 5. Changes In Expectations Of Future Price If firms expect the price of their good to sell at a higher price in the future, they will hold off selling part of their goods for this greater price 6. Changes In Government Taxes, Subsidies And Regulations Increases in taxes causes a reduction in supply (greater production costs) An increase in subsidies reduces firm s costs and increase supply Regulations change supplier s costs and can affect supply